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Clear Channel Agrees to Performance Royalties

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If you hadn’t noticed, the music industry is in a bit of a rough patch. Plummeting album sales and the lower profit margins of digital purchases from outlets like iTunes (AAPL), Amazon (AMZN), and Google Music (GOOG) make earning a living as an artist harder than it’s been since the invention of the Victrola. A new agreement between the nation’s largest radio conglomerate and Nashville label could be the first step in the other direction. At the very least, it represents a potential sea change in how artists are compensated for the use of their performances.

Currently, royalties for commercial airplay are based on a 1917 Supreme Court ruling that said compensation should be paid to the composer -- and thus, not the performer. That didn’t mean much in the days when music’s biggest revenue streams came from sheet music and player pianos, and commercial radio was still just a gleam in David Sarnoff’s eye. Once radio exploded, however, this was clearly a raw deal for artists. A song would become a hit because of a particular performance, but the lion’s share of the money it earned would go to the composer and publisher, an unfair system that led to further chicanery. Witness how many chartbusters of the 1950s were mysteriously “written” by unscrupulous managers and DJs.

Despite the explosion of satellite and online alternatives, terrestrial radio remains the biggest source of airplay for artists, partly due to the fact that radio retains an unfair economic advantage over its upstart brethren. The newer media have, for the most part, agreed to performance royalties that don’t burden the old-school radio outlets. Pandora (P) recently announced it would remain in the red for at least another year, and pointed to performance royalties as one of its barriers to profit.

Clear Channel appears to be bucking this trend, or at least dipping its toe into those waters. It has come to an agreement with the Big Machine Label Group -- home to Taylor Swift, Tim McGraw, and other country stars -- to pay performance royalties for terrestrial radio play. The exact parameters of the deal are unclear, but why would the biggest radio company in the history of time volunteer to pay royalties?

Probably because a deal like this now could be ultimately lucrative. Clear Channel’s deal reportedly gives discounts to online radio play, thus giving an incentive to steer airplay in that direction. It’s a clear indication that they’re banking on the continued growth and expansion of Pandora-like online services. By paying a little now, Clear Channel steels themselves against a potential future where terrestrial radio goes the way of the dodo and online listening is the only game in town. It does not, however, have any contingencies for the inevitable retro piano roll fad.
POSITION:  No positions in stocks mentioned.